Safe Haven

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At a time when a majority of asset classes and countries look vulnerable to yet unforeseen financial shocks, the Sultanate of Brunei Darussalam provides plenty of compelling reasons for foreign investors looking for a safe financial haven.

While not immune to the global economic slowdown and falling oil prices - its main export commodity - the Sultanate appears to have very little exposure to toxic financial instruments and enjoys a stable financial sector.

Even before the global financial crisis began, the banks and local authorities were mindful of improving the quality of banking assets and promoting a culture of responsible borrowing and saving. The level of new Non Performing Loans (NPLs) is therefore quite low by regional standards.

As of 2006 a new Banking Order ensured that the local banks were well capitalised, with minimum capital requirements raised to BN dollar 100m. The local banks thus entered the global financial crisis in much better shape than many regional peers.

Yet, it is the macroeconomic story that is a source of confidence. The ongoing financial crisis tends to hit the countries with high debt-to-GDP ratios and significant external financing needs. These are usually countries which have balance of payments problems, with high currency account deficits. The case in point is Pakistan which was on the verge of financial meltdown due to the lack of external financing.

Brunei Darussalam is fortunate to have none of the difficulties experienced by highly leveraged countries with external imbalances. It has traditionally been an exporter rather than an importer of financial capital and has been running high current account surpluses, which were saved in strategic reserve funds.

Its debt-to-GDP is one of the lowest in the region and its consolidated fiscal position provides plenty of room for expansionary government spending policy. The existence of clearly formulated government spending plans is a bonus at a time when most countries are forced to improvise their fiscal stimulus.

In monetary policy, too, Brunei Darussalam looks like a better bet than most countries in the region. Brunei dollar's hard peg to the Singapore dollar does raise concern in some quarters, but in relative terms the Singapore dollar is less vulnerable given Singapore's large foreign currency reserves and well managed monetary policy.

As a place to store liquidity, Brunei Darussalam is therefore one of the safest locations in the region, which gives it an opportunity to establish itself as a financial offshore centre. However, that goal will also require attractive returns on capital, which in its turn requires healthy economic activity.

For now at least the focus is on the central government to inject new momentum into the slowing economy. The challenge is that the public investment has to come at a time of low oil prices and therefore lower government revenues.

The authorities are expected to be very cautious in prioritising their investment to preserve some of their strategic reserves against further external shocks. However, the fall in oil and gas prices might come as a blessing in disguise if the government is able to finance new projects in non-oil and gas sectors.

Even in hydrocarbons downstream space, there could be signs of new developments. When the oil prices were very high, the main issue was that the opportunity cost of using domestic oil and gas to develop new downstream sectors was quite high. That was the main sticking point in rolling out such high profile projects as the Brunei Methanol Company.

The correction in oil prices thus indirectly favours diversification, which has long been Brunei's top strategic economic goal. But as some industry players point out, the key issue is financing. Although the logic of diversification has become far more compelling, banks are reluctant to lend to corporations and financial institutions in a downturn, no matter how safe and liquid they are.

This is particularly true in so-called risky sectors such as small and medium enterprises which lack good quality collateral to raise the necessary financing. It therefore falls on the government and the public sector to play the role of financial intermediaries to get the economy back on solid footing.

Despite the challenges, the economic slowdown in Brunei Darussalam is expected to be much milder. The country may even come out of the crisis ahead of its regional peers with the strong comparative advantage of being perceived both politically and financially stable by foreign investors - a rare asset in these troubled times.

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